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1. Oil and the Global Economy

Oil prices have fallen steadily since touching a high of $83 a barrel two weeks ago and closed on Friday at $75.39 a barrel. Demand for gasoline in the US the week before last fell to 9.2 million b/d from 9.6 million in the week ended July 23rd. As has been the case for several weeks, a steady stream of bad economic news convinced the oil markets that the outlook for increased oil consumption is not good. Despite all the gloom, the official forecasters — the IEA, the EIA, and OPEC — are still forecasting substantial growth in world demand for oil between now and the end of 2011 with global consumption rising by another million or more b/d.

The IEA estimates that world oil supply rose by 850,000 b/d in July to 87.2 million b/d and forecasts that with business as usual world demand will average nearly 88 million b/d next year. The Agency does warn that there are -significant downside risks‖ and that a weaker economic situation could reduce their projected 1.3 million b/d growth in global demand to nearly un-changed.

The US‘s EIA is now expecting that crude output from the Gulf of Mexico will fall by an average of 120,000 b/d next year due to the consequences from the Deepwater Horizon explosion, such as the six month drilling moratorium and delays resulting from tougher regulation. The IEA takes an even more pessimistic view, saying that the BP spill places the ability of the oil industry to access new reserves on a -knife edge‖. The Agency estimates that nearly 50 percent of the new oil supplies needed by 2015 would have to come from offshore fields, much of it from deep water. With operating and regulatory standards likely to be tightened and sensitive areas such as the Arctic seeing permitting delays, the pace of offshore oilfield development could slacken.

OPEC‘s Secretariat also issued a revised forecast for oil demand in 2010 and 2011 increasing its outlook for 2010 and 2011 by 140,000 b/d. The cartel too sees demand for oil increasing by more than a million b/d next year to an average of 86.5 million b/d, considerably lower than the IEA‘s estimate of nearly 88 million b/d for average demand in 2011. OPEC‘s lower-than-usual growth estimate is attributed to sluggish economic growth and large stockpile surpluses.

Any increase in oil consumption next year is likely to come from the usual suspects – China, India, and domestic demand in the oil exporting nations themselves. Whether the global oil industry can absorb another million b/d increase in demand during the next 18 months without growth-shattering oil price increases remains to be seen. OPEC seems to be pumping close to flat out. The Saudis may or may not have a few million b/d of light-enough-to-sell spare productive capacity. Some say that an increase in production from non-OPEC sources may add another 800,000 b/d in the next 18 months. This increase is expected to come from the China, Russia, and even the US where some see a 300,000 b/d increase in production next year – provided of course that regulatory issues don‘t bog things down.

2. China cooling

A spate of new numbers and pronouncements came from of Beijing last week all adding to the question of just where China‘s massive, surging, and, in some sectors, overheating economy is headed. Much of the news focused around record high energy consumption in the first half coupled with a declining pace of economic growth in July. China‘s oil consumption in the first half of the year increased by 15 percent over 2009. Electricity consumption in July increased by 12 percent over last year. As in the case in much of the world, increased use of air conditioning to combat higher temperatures was behind the growing summer demand for electricity as temperatures set new records.

While much was made of the -slowdown‖ in China‘s growth in the financial press, year over year increases of 14 percent or more in many industrial sectors does little to curb the demand for oil, coal, and electricity. Beijing reported that net crude purchases did fall in July to 18.8 million tons (4.5 million b/d) from 22.1 million in June, but China‘s imports have always been variable. A massive oil spill at a major import terminal did not help matters. Many areas in western China are suffering from severe floods and landslides that must be reducing demand.

China‘s trade surplus widened during July. While export growth slowed slightly to a 38 percent increase over last year, imports slowed to a 23 percent increase in July vs. a 34 percent year over year increase in June. The rather spectacular increases in exports in recent months are attributed to inventory restocking by foreign purchasers and are not expected to continue for the rest of 2010.

As we move farther into the second half of 2010, Chinese growth-although down from the first half-is still impressive by any standard and is likely to keep up pressure for more energy. Last week the EIA raised its forecast for growth in China‘s oil demand by 80,000 b/d to 650,000 b/d in 2010. The EIA also raised its estimate for the increase in China‘s oil demand growth in 2011 by 10,000 b/d to 560,000 b/d. With growth rates such as we have seen in China in recent years, the widely touted -slowing of China‘s growth rate‖ does not mean much when placed in perspective.

Although China has an impressive list of long-term economic and social troubles, none of these seem likely to derail China‘s rapid economic growth in the immediate future or China‘s steadily increasing demand for substantial annual increases in its oil imports. If this proves to be the case, then projections of 1 million+ b/d for increasing global demand for oil are likely to be valid.

Increasing demand for oil, increasing depletion of existing oil fields, and dimming prospects for the necessary increase in production from new oil fields all suggest that much higher oil prices and oil shortages are likely within the next few years.

Quote of the Week

T. Boone Pickens’ plans to save the United States from its energy dependence on so-called hostile petro-powers is, simply put, full of hot air. The abundance of shale gas in the U.S. will no more free the country’s motorists from dependence on foreign oil than have either the American production of over ten billion gallons of corn-based ethanol or the rollout of GM’s electric-powered Volt.

— Jeff Rubin, consulting economist and author

Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)

  • The head of Saudi Aramco has brushed aside ‘peak oil’ concerns, saying the world has a plentiful supply of oil and gas, with a vast quantity of known reserves yet to be tapped and additional resources still to be discovered. (8/11, #11)
  • The typical drop in world oil demand between the first and second quarters of the year-after the heating season is over-is disappearing, and could even be reversed as the global market increasingly takes its cue from consumption trends in non-OECD countries. (8/12, #4)
  • BP has pushed back the start of its exploration for oil in deep water offshore Libya for an unspecified period of time to ensure all its plans are in order, but the company and the Libyan authorities insist the drilling will be safe. (8/12, #10)
  • Ecuador‘s populist President Rafael Correa wants to take a big slice of profits away from foreign oil companies operating in the Andean nation, which is facing protracted economic problems. (8/9, #9)
  • Turkish firefighters on Thursday extinguished a fire on the pipeline carrying oil from Iraq to Turkey that was bombed by Kurdish rebels earlier in the week. (8/13, #9)
  • Venezuela’s crude output in July was 2.23 million b/d, unchanged from June’s figure, the IEA said Wednesday. Venezuela claims output is about 2.9 million barrels of crude a day, much higher than both IEA and OPEC figures. (8/12, #12) [Editor’s note: our money is on the IEA.]
  • Nigeria has pledged to pay billions of dollars in long-overdue bills this month for fuel imports. Nigeria imports almost all of its oil products–despite being one of Africa’s largest crude exporters–because its four refineries are barely operational, due to poor maintenance, theft and fire. (8/11, #12)
  • Russia’s nuclear agency announced that it will load fuel into Iran’s first nuclear power plant this week. The US has called for Russia to delay the start-up until Iran proves that it’s not developing nuclear weapons. (8/13, #10)
  • Tougher sanctions against Iran appear to have halved the country’s petrol imports in July, according to the International Energy Agency. (8/12, #6)
  • Turkey‘s planned sale of petrol to Iran, as well as other projects it is planning with its neighbor, may indicate a shift in its energy policy to give priority to its energy-rich neighbors in the Middle East over conditions set by its traditional Western allies. Russian oil giant LUKOIL has also resumed gasoline sales into Iran in partnership with China’s state-run firm Zhuhai Zhenrong.. (8/12, #7)
  • Iran is curbing its ambitions to become a major liquefied natural-gas exporter, a reversal that energy executives and analysts tie to the country’s difficulty accessing Western technology amid fresh international sanctions. (8/12, #8)
  • Iran has made arrangements to start selling its oil in any currency rather than just the US dollar, central bank chief Mahmoud Bahmani said on Friday. (8/14, #5)
  • US oilfield services firm Halliburton Co said it has performed the first hydraulic fracturing operation in Poland, a country where oil and gas companies have been snapping up acreage for exploration. (8/13, #18)
  • Oil rigs operating in the U.S. jumped the most in nine months this week after prices climbed to a three-month high of $82.97 a barrel last week, according to Baker Hughes. Rigs exploring for and producing oil climbed by 25 to 636, the highest level since January 1991. Gas rigs gained nine to 992, the highest level since Feb. 20, 2009. The gas rig count, however, is down 38 percent from a peak of 1,606 in September 2008. (8/14, #12)
  • Environmental groups and landowners, upset by last month’s oil spill in Michigan, are urging the Obama administration to deny a proposal for an oil pipeline that would go from the Montana-Canada border to refineries along the Texas Gulf Coast. (8/12, #19)
  • Pennsylvania regulators are illegally allowing natural gas companies to withdraw water from rivers and streams for use in the Marcellus Shale drilling boom, an environmental group claims. (8/10, #16)
  • US energy companies are steaming about a disclosure rule added at the last minute to the new financial regulation law requiring companies to disclose their payments to foreign governments. The provision in the Dodd-Frank law compels companies to reveal royalties, bonuses and other payments to governments for the “commercial development of oil, natural gas or minerals.” The companies say complying with the rule could hamper business. (8/11, #8)
  • EOG Resources said its comfort level is rising slowly in the Niobrara shale oil play in the Denver basin as it awaits more well production history before formulating reserves estimates. (8/12, #18)
  • Iraq’s top army officer has criticized as premature the planned US troop withdrawal by the end of next year. Lt Gen Babaker Zebari warned that the Iraqi military might not be ready to take control for another decade. (8/12, #5)
  • About China’s coal consumption, Jean Lahererre‘s main point is that EIA data provides a different picture to that provided by BP and that the BP data are likely wrong. China is importing much more coal than in the past. (8/9, #16)
  • Nearly 45 percent of the electricity in Portugal’s grid will come from renewable sources this year, up from 17 percent just five years ago. (8/10, #17)
  • 2010 is on pace to become the warmest year, worldwide, since record-keeping began more than a century ago. The scorching weather has caused massive droughts in Thailand and Israel, and killed hundreds in India. Russia is still suffering from its worst heat wave in 130 years. (8/10, #20)
  • Production of rice — the world’s most important crop for ensuring food security and addressing poverty — will be thwarted as temperatures increase in rice-growing areas with continued climate change, according to a new study by an international team of scientists. (8/12, #16)
  • An island of ice more than four times the size of Manhattan is drifting across the Arctic Ocean after breaking off from a glacier in Greenland. Potentially in the path of this unstoppable giant are oil platforms and shipping lanes – and any collision could do untold damage. (8/11, #9)
  • Greenland’s ice mass will disappear if temperatures rise by as little as 2C, with severe consequences for the rest of the world, a panel of scientists told Congress last week. (8/13, #5)